Cointelegraph is following the development of an entirely new blockchain from inception to mainnet and beyond through its series, Inside the Blockchain Developer’s Mind. In previous parts, Andrew Levine of Koinos Group discussed some of the challenges the team has faced since identifying the key issues they intend to solve, and outlined three of the “crises” that are holding back blockchain adoption: upgradeability, scalability and governance. This series is focused on the consensus algorithm: Part one is about proof-of-work, part two is about proof-of-stake and part three is about proof-of-burn.
In the first article in the series, I explored proof-of-work (PoW) — the OG consensus algorithm — and explained how it works to bootstrap decentralization but also why it is inefficient. In the second article, I explored proof-of-stake (PoS) and how it is good for lowering the operating costs of a decentralized network relative to proof-of-work, but also why it further entrenches miners, requires complex and ethically questionable slashing conditions and fails to prevent “exchange attacks.”
In this article, I will explain the third consensus algorithm that was proposed about a year after proof-of-stake but, for reasons that should become clear, has never actually been implemented as a consensus algorithm on a general purpose blockchain. At least, not until now.
Proof-of-work
As I explained in the first article, from a game-theoretical perspective blockchains are a game in which players compete to validate transactions by grouping them into blocks that match the blocks of transactions being created by other players. Bitcoin (BTC) works by assigning more weight to blocks produced by people who have probably sacrificed more capital which they “prove” through “work.”
Since these people have already spent their money to acquire hardware and run it to produce blocks, their punishment is easy because they’ve already been punished. Proof-of-stake, however, operates in a fundamentally different way that has important game-theoretical consequences.
Proof-of-stake
Instead of forcing block producers to sacrifice capital to acquire and run hardware in order to gain the ability to earn block rewards, in proof-of-stake, the token holders need only sacrifice the liquidity of their capital in order to earn block rewards. The problem is it decreases network security because the attacker need only acquire 51% of the base currency of the platform and stake it to take control of the network.
To thwart this attack, PoS systems that must implement complicated systems designed to “slash” block rewards from user accounts, which adds to the computational overhead of the network, raises legitimate ethical concerns and only work if the attacker fails to acquire 51% of the token supply. Implementing these slashing conditions is by no means trivial, which is why so many proof-of-stake projects like Solana have, by their own admission, launched with centralized solutions in place, and why so many other projects like Ethereum 2.0 (Eth2) are taking so long to implement PoS. The typical solution is to give a foundation a large enough stake so that it alone has the power to determine who is a malicious actor and slash their rewards.
This is especially problematic in a world with centralized exchanges that feature custodial staking which means it can find itself in control of over 51% of a given token supply without having incurred any risk, making the cost of an attack deminimus. In fact, this has already happened in recent history on one of the most used blockchains in the world, at one time valued at nearly $2 billion: Steem.
Related: Proof-of-stake vs. proof-of-work: Differences explained
Holy Grail consensus
As I said at the end of my last article, what we will be discussing in this article is the hypothetical question of whether there is a “best-of-both-worlds” solution that delivers the decentralization and security of proof-of-work with…
Read More: cointelegraph.com